Sunday, December 23, 2012

Fed introduces serrated edges on banknotes

Bernanke supported the new tactic against debasing US
currency, “It is essential that our paper money is not debased. Cutting off the
ends of paper notes and taping those little bits together to make new notes
will increase the money supply and lead to inflation. This should put an end to
the practice.” In a statement issued earlier Geithner, the US Treasury
Secretary, agreed; “People will now be confident they will be receiving the
full amount of paper they are entitled to by law”.

Markets reactions were mixed. The dollar surged compared to
a basket of foreign currencies and the difference between nominally denominated
and inflation protected interest rates decreased. Both indicate that
inflationary expectations decreased. However, both the Dow Jones Industrial
Average and S&P 500 declined upon hearing the news.

Some economists are against the measure. Krugman wrote in
his blog “This is the last thing we need right now. What we need to do is increase
inflationary expectations to get people spending money again. This will only
exacerbate liquidity trap we are already in.” Krugman then added “Why doesn’t
anyone listen to me?!”

This is the most recent excursion into uncharted territory
ever since the “Great Recession” began. Previous unconventional methods have
included Quantitative Easing 1, Quantitative Easing 2, and Quantitative Easing
infinity.